INFLATION IN INDIA
Author: Priyanka Waghamode
Prakash, (2010) states When inflation in India stays high for a long time, it affects how the government and the Reserve Bank of India (RBI) manage the economy. They need to decide how strict their policies should be to control inflation without slowing down growth too much. To do this, they try to find a specific level of inflation—called the “threshold level”—at which inflation starts harming economic growth. If inflation crosses this limit, it can reduce people’s purchasing power, increase business costs, and slow down the economy. By understanding this threshold, policymakers can take timely actions, such as adjusting interest rates or controlling money supply, to keep inflation under control while ensuring the economy continues to grow.
Inflation and Income Inequality
Mr. James & Jiangyan, (2012) presents that higher non-food inflation in India leads to greater inequality. This happens because not everyone benefits equally from higher prices. A family or business earns more only if they sell goods or services that have become expensive. However, no single family or business produces all types of non-food items, so they cannot fully benefit from inflation. As a result, some people and businesses make more money, but many others do not see any increase in their income. Instead, they have to pay higher prices for things like clothing, housing, and transportation, making life more expensive. This makes it harder for lower-income groups to afford basic needs while wealthier individuals or businesses that sell these expensive goods benefit. In this way, rising non-food prices widen the gap between rich and poor, increasing income inequality.
Unravelling India’s Inflation Puzzle
Pankaj & Srinivasan, (2014) states Experts are confused about why inflation is still high even though the economy is slowing down. Normally, when economic growth slows, inflation also decreases, but that hasn’t happened. One reason is that the RBI responded too late after the global crisis. It believed the economy would grow faster than it actually did, so it delayed taking action to control inflation. By the time it introduced stricter policies, inflation had already spread throughout the economy. As a result, even though the economy is slowing down now, inflation is still high and has not come down as expected.
Measures of Inflation
Graham, (2014) presents that for a long time, the Indian government used the Wholesale Price Index (WPI) to measure inflation. However, now the Consumer Price Index (CPI) is considered more important. This is because WPI tracks the prices of goods at the wholesale level, which does not always reflect the actual price changes that consumers face. On the other hand, CPI measures the prices of goods and services that people buy for daily use, like food, clothing, and rent. Since CPI directly shows how inflation affects households, it is more useful for making decisions about monetary policy, such as setting interest rates to control inflation.
Economic growth and Inflation
Bhavesh & Patnaik, (2017) concludes that The Reserve Bank of India (RBI) follows an inflation-targeting approach, meaning it takes steps to control inflation. However, while doing so, it must ensure that economic growth is not negatively affected. If inflation control is too strict, businesses may struggle, leading to slower growth and fewer jobs. To strike the right balance, policymakers study the relationship between economic output (total goods and services produced) and inflation. The “output gap” refers to the difference between actual and potential economic growth. Understanding this gap helps the RBI make better decisions, ensuring inflation is controlled without harming economic growth.
Determinants of Food Inflation
Narula & Anirudh, (2019) states Food inflation plays a major role in India’s economy, so understanding its causes is important. It is observed that food prices increase faster than the prices of other goods. The main reason for this is the rising cost of essential food items such as milk, eggs, meat, sugar, edible oils, and staple foods like rice and wheat. Prices of fruits and vegetables, especially onions, tomatoes, and potatoes, also contribute to food inflation. These price increases can be caused by factors like supply shortages, rising demand, transportation costs, and weather conditions. Since food is a basic necessity, high food inflation directly affects people’s daily lives and the overall economy.
Commodity Price And Inflation Dynamics
Syed & Sahminan, (2020) presents BRIICS countries (Brazil, Russia, India, Indonesia, China, and South Africa) depend a lot on natural resources like oil, gas, and minerals. Because of this, any change in the prices of these commodities affects their economy, including trade, industries, and inflation. In India, inflation is highly influenced by the prices of oil, energy, and food. When these prices go up, transportation and production costs increase, making everyday goods more expensive. This puts financial pressure on businesses and people, leading to a rise in overall inflation.
Relationship between Oil Price and Inflation
Zafar, et al (2020) concludes that Since 2014, a positive development in India has been the decline in inflation to a moderate level. One major reason for this was the drop in crude oil prices in the global market. Between 2014 and 2017, India benefited from lower oil prices in several ways. The country saved foreign exchange reserves because the cost of importing oil was lower. This helped boost economic growth and kept inflation under control. However, since then, oil prices have started rising again. This is expected to have a negative impact on the Indian economy by increasing fuel costs, raising transportation and production expenses, and pushing inflation higher.
What lowered inflation in India
Pulapre & M Parameswaran, (2021) states that 64. In 2021, India completed five years of following an inflation-targeting policy. This means the Reserve Bank of India (RBI) set a specific range within which inflation should stay and took measures to control it. This is seen as a success because inflation remained within the set limit for five years, which was lower than in earlier years. This happened because the RBI carefully monitored inflation and used policies like adjusting interest rates to keep it under control. This approach helped maintain economic stability by preventing extreme price rises.
How GST Regime Affect Inflation
Bhattacharya & Rudrani, (2024) presents Research on different countries shows that the impact of GST on inflation is not the same everywhere. In India, when GST was introduced, it caused a rise in overall inflation, mainly because it increased the prices of food items. This effect lasted for about two years. However, GST did not significantly affect core CPI inflation, which excludes food and fuel prices, or inflation in the manufacturing sector (WPI). This means that while GST made some essential goods more expensive, it did not have a major impact on other parts of the economy.
Conclusion:
In recent years, India has experienced significant changes in inflation trends due to various economic policies and global factors. Inflation targeting by the Reserve Bank of India (RBI) has helped keep inflation within a moderate range, contributing to economic stability. However, external factors like crude oil price fluctuations and the introduction of the Goods and Services Tax (GST) have influenced inflation in different ways.
Lower oil prices from 2014 to 2017 helped control inflation, boost economic growth, and strengthen foreign exchange reserves. However, as oil prices started rising again, inflationary pressures returned, affecting the economy. Similarly, GST had a temporary impact on inflation, mainly by increasing retail food prices, but its effect on core inflation and manufacturing inflation remained limited.
Additionally, non-food inflation has been a key driver of income inequality in India, as rising prices do
not benefit all households equally. Commodity price changes, particularly in oil, energy, and food, also play a major role in shaping inflation trends.
Overall, India’s inflation trends are influenced by both domestic policies and global market conditions. Policymakers must carefully balance inflation control with economic growth to ensure long-term stability.
References:
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